Defying Gravity?

Defying Gravity?

23rd June 2017

Oil prices suffered again this week with WTI hitting a 10-month low (US$42.13 per barrel) while drillers continued their advance, adding 7 onshore rigs bring the total to 915 and increasing activity for a 23rd week in a row.  Onshore rigs now stand 518 rigs above the same period a year ago, 428 targeting oil. 

The market is searching for proof that OPEC’s cuts are shifting petroleum balances, and the weekly data, so far, has not provided a clear signal. Crude prices are now on the hunt to find the stress point for the US shale producers who, for the time being at least, appear to be defying gravity …

Crude – WTI Hits 10-month Low (US$42.13)

So far this year the oil price has slid 20%, its weakest performance since 1997 for the first half of the year (a period when price is expected to rise).

This is despite efforts to cut output by OPEC and to coordinate with Moscow to trim Russian supplies. In May, OPEC and non-OPEC members led by Russia extended supply cuts through the first quarter of 2018 in an effort to drain global inventories.

EIA’s weekly report on Wednesday, that crude inventories fell 2.5 million barrels and gasoline stockpiles slipped 0.6 million barrels, gave prices a slight boost, before they resumed their descent.  The EIA noted, however, that petroleum in storage remained very high and that gasoline was above the upper limit of the average range for this time of year.

OPEC’s strategy to drain crude inventories will take more time to work. Bearish sentiment on oil may not be matching the fundamental backdrop and perceptions of the current market are keeping oil prices suppressed.  US gasoline demand remains strong and US crude oil stockpiles had fallen in 10 of the past 11 weeks, down 27 million barrels. Global inventories are expected to continue down over the next 18 months. However, how far down crude inventories will decrease remains unknown and the market is keen to learn.

There are reasons crude prices have not responded positively - a doubling in the number of drilling rigs and increases in shale-drilling efficiency has boosted US crude oil production to more than 9.35 million barrels a day, up over 850,000 barrels a day from September.  On top of this Nigeria and Libya, both exempt from OPEC quotas, have recently boosted production, offsetting other OPEC cuts and raising the cartel’s total output.

Natural Gas – Canadian Gas Does An About Turn

A few weeks ago, the election in British Columbia was highlighted in this bulletin, with speculation that it could determine the direction of gas policy in that part of the world.  Well, it seems the electorate got tired of Christy Clark’s “jam tomorrow” vision of LNG, and her ruling liberal party lost their majority, putting into doubt the LNG export projects her government supported.  With the left-leaning NDP and the Green Party holding sufficient power to block approvals, it seems certain that the LNG plans for the province will be put under even more pressure, while their American cousins continue to forge ahead.

This week it seems some of the pipeline companies, at least, are betting that this is going to be the case.  With TransCanada announcing a US$2bn expansion of their Nova system that takes gas away to eastern Canadian and US markets, and Enbridge announcing that their T-South system (that goes from Northern BC to Vancouver) was struggling to meet demand, it seems a growing portion of Western Canadian gas is heading east rather than west.  The political uncertainty in BC has also cast doubt on Kinder Morgan’s Trans Mountain pipeline, already approved by Canada’s federal government.

Whether or not the NDP-Green alliance in BC manages to topple Premier Christy Clark, or whether she and her pro-LNG policies manage to win through, remains to be seen.  However, in the meantime gas producers, and pipeline companies, seem to be voting with their feet.  As US shale players start to migrate away from “sweet spots” as these become drilled up, gas from Canada’s Montney, Duvernay and Horn River shale basins might start looking like attractive places to source US LNG feedstock, especially once these pipeline enhancements are complete.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 941, up 8 last week, with rigs targeting oil up 11. The horizontal rig count increased to 792 up 10 last week.

The total number of active onshore rigs increased to 915.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 51% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 497 (up 5 last week), with Permian up 1, Eagle Ford up 1 and Williston up 3.

Crude Oil Price 

Brent, the global benchmark for oil, decreased US$2.25 to US$45.20 a barrel, reflecting a loss of 4.74% on the week.

WTI crude fell US$2.18 to US$42.68 a barrel, down 4.86% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.2 million barrels per day, with refineries at 94% of their operating capacity last week. This is 104,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 9.6 million, down 1.6% from a year ago. Total commercial petroleum inventories decreased by 1.9 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 20,000 barrels to 9.35 million barrels a day. The Lower 48 crude production now stands at 8.865 million barrels per day, up 25,000 this week.

US crude imports averaged 7.9 million barrels per day last week, a decrease of 149,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, 2.0% above the same four-week period last year.

Crude oil inventories decreased 2.5 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 1.1 million barrels; total storage is 61.1 million barrels (~68% utilization).

 

Authors

Defying Gravity?

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Defying Gravity?

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com

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